Great Elm Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2023, the company’s first fiscal quarter of fiscal 2024. The filing was signed November 8, 2023. Great Elm is an alternative asset manager focused on credit, real estate, specialty finance, and other strategies; assets under management of its managed entities were approximately $640.6 million at quarter-end.
Financial performance and position
| Metric | Quarter ended September 30, 2023 | Comparable 2022 quarter |
|---|---|---|
| Revenue | $3.31 million | $1.86 million |
| Operating loss | $1.45 million | $1.96 million |
| Net income (loss) attributable to Great Elm | $2.77 million | $(8.29) million |
| Basic / diluted EPS | $0.09 / $0.08 | $(0.29) / $(0.29) |
| Cash and cash equivalents at quarter-end | $41.08 million | $22.55 million at September 30, 2022 |
| Operating cash flow | $(6.13) million | $(0.78) million from continuing operations |
- Revenue rose 78%, principally from $1.26 million of incentive fees from GECC; management fees were $1.42 million. Operating costs rose to $4.76 million from $3.82 million. The operating margin was approximately negative 44% versus negative 105% in the prior-year quarter.
- Continuing-operations income before taxes was $2.76 million, versus a $9.27 million loss. Net realized and unrealized investment gains were $3.28 million, compared with losses of $6.80 million; dividends and interest income were $1.99 million versus $1.47 million. These investment items materially influenced earnings.
- Operating cash use reflected, among other items, a $7.0 million net unfavorable change in operating assets and liabilities. Investing activities used $12.60 million, including purchases of investments; total cash decreased $19.09 million during the quarter.
- At September 30, total assets were $136.24 million and stockholders’ equity was $67.32 million. Current assets were $123.85 million and current liabilities $5.28 million.
- Debt included $26.95 million principal of 7.25% notes due June 30, 2027, and $37.91 million principal of 5% convertible notes due February 26, 2030. The filing reports a net consolidated debt-to-equity ratio of 0.35:1, below the notes’ 2:1 covenant threshold. Convertible-note interest has been paid in kind to date.
Material changes and notable items
- Revenue increased by $1.45 million year over year, driven mainly by newly recognized GECC incentive fees. Investment management expenses excluding non-cash compensation increased $0.85 million, largely due to compensation-related costs.
- Interest expense declined to $1.06 million from $1.97 million, mainly because certain prior-period debt-related interest was no longer incurred.
- The Durable Medical Equipment business was sold on January 3, 2023. Its prior-year results are presented as discontinued operations, so comparisons of total earnings and cash flows include a different business mix.
- The company invested $14.28 million in continuing-operations investments, partly offset by $1.79 million of investment-sale proceeds. It also capitalized $1.4 million of development costs for two build-to-suit real estate projects; leases are expected to commence by the second calendar quarter of 2024, and the company intends to sell the properties at or near lease commencement.
- A $0.98 million contingent-consideration payment was made in July 2023; $0.94 million remained recorded at quarter-end. The filing also reports $2.3 million of unfunded binding commitments to make additional investments.
Liquidity, outlook, and risks
- Management reported $41.1 million of unrestricted cash and stated it believes liquidity is sufficient for short- and long-term obligations for at least the next 12 months. The company also held 1,493,560 GECC shares, valued at approximately $14.7 million in management’s discussion.
- The company said it continues to explore investment-management opportunities and other investments it believes may provide attractive risk-adjusted returns. No quantitative earnings or revenue guidance was provided.
- Key disclosed risks include the performance and distributions of managed entities, investment results, real estate development and sale outcomes, ability to raise capital and make acquisitions, market and interest-rate conditions, competition, key-person retention, regulation, cybersecurity, and litigation. The company reported no material changes to previously disclosed risk factors and no pending or threatened litigation expected to have a material adverse impact.
- Management concluded disclosure controls were effective as of September 30, 2023; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether GECC incentive fees recur, and how fee income and assets under management develop.
- The composition, valuation, liquidity, and performance of investments, including the company’s GECC stake and private-fund investments.
- Cash-flow conversion and the causes of operating cash use, including working-capital movements and planned investment spending.
- Debt terms, cash-versus-in-kind convertible-note interest choices, dilution potential, and continued compliance with note covenants.
- Progress, completion costs, lease commencement, and expected sale proceeds for the build-to-suit real estate projects.
- Related-party arrangements and contingent-consideration obligations, including the remaining payment and fee-threshold assumptions.